Determine the pessimistic

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A heat exchanger is being installed as part of a plant modernization program. It costs $80,000, including installation, and is expected to reduce the overall plant fuel cost by $20,000 per year. Estimates of the useful life of the heat exchanger range from an optimistic 12 years to a pessimistic 4 years. The most likely value is 5 years. Assume the heat exchanger has no salvage value at the end of its useful life.

(a) Determine the pessimistic, most likely, and optimistic rates of return.

(b) Use the range of estimates to compute the mean life and determine the estimated before-tax rate of return.

Reference no: EM131809517

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